Friday, May 22, 2015

Dan Popescu on The SDR, Gold and China

We are now seeing more and more thought provoking articles on this topic show up as we move towards this fall when the IMF will let us know if the Chinese Yuan will be added to the SDR currency basket. This is a major story for this blog to cover. In this article, Dan Popescu offers his thoughts on how all this may turn out and makes his case for why eventually the global financial system will have to re-anchor to actual gold. 

Below are some a few quotes from this article and then a few comments.


"During the recent visit to China by the president of the International Monetary Fund (IMF), Christine Lagarde, the government of China formally requested that the Yuan be included in the Special Drawing Rights (SDR) at this year’s review. I wrote a shortarticle on gold and the SDR in April 2014, when few were even mentioning it. Let me, with the help of some charts, explain what the SDR is, its relation to gold and what role it can play in the international monetary system, if any.
The IMF created the Special Drawing Rights (SDR) in 1969. Originally, the value of an SDR was defined as equivalent to 0.888671 grams of fine gold which, then, was also equivalent to 1 US dollar (1oz of gold = 35 SDRs = US$35). After the gold exchange standard, commonly called the Bretton Woods Accords, collapsed in 1973, the SDR was redefined as a basket of currencies, today comprising of euros, Japanese yens, British pounds and US dollars. It is calculated as being the sum of a specific amount of the four currencies in the basket, rated in US dollars based on the exchange rate fixed at noon, each day, on the London market. Today, since December 2010, the value of one SDR equals the sum of 0.423 euro, 12.1 yens, 0.111 British pound and 0.66 US dollar."
 . . . . . 
"We know there is a review going on right now of the SDR, but we don’t know which version will be adopted. Will it only add China’s Yuan? Will Russia, India and Brazil agree with it, or will they ask for their currencies to be considered also? Could gold also be part of some form of the SDR?
Remember that China’s Yuan is presently pegged to the US dollar, so it would make no sense to include it into the SDR before it is un-pegged. Lawrence Williams, in a recent article, says, “The possible inclusion of the Yuan in a revised SDR and the un-pegging of the Yuan from the dollar are all inextricably linked and the countdown to this is already under way.” I would add that the update of China’s gold reserves is also linked to the un-pegging and SDR’s inclusion of the Yuan."
. . . . . 
"China certainly has a long-term strategy and a short one. It seems the immediate one is to get the Yuan included this year into the SDR and sign as many agreements as possible to use the Yuan in international trade, rather than the US dollar. Longer term it wants to get the Yuan backed by as much gold as the US dollar and the euro are. China wants to destroy the “exorbitant privilege” of the US dollar, making the dollar just another currency. This explains the massive buying of gold by China, especially since 2008. An announcement of China’s official gold reserves is expected at the same time as the inclusion of the Yuan in the SDR, sometime in the fall of 2015."
A major financial crisis that is expected soon could derail China’s strategy and collapse the present system before a system based on the new SDR is being approved. Still, the large accumulation of gold will put China in a very strong negotiating position.   . . . . .
. . . . .
"As far as I am concerned, I cannot conceive, just like General de Gaulle, president of France (in his 1965 speech, at the end of the “gold exchange standard”), that “there might be any criterion, or standard, other than gold. Yes! gold, that is never altered, that can be made into bars, ingots or coins, that has no nationality, that has been held, eternally and universally, as the most excellent unalterable and fiduciary value”. It would also reconnect the international monetary system back with the real world."
My added comments:
Readers here know that I do not try to forecast how all this will turn out. Instead I try to offer a variety of views from experts who are able to discuss the topic in ways that the average person can understand. As we see more and more articles like this, it is becoming clearer and clearer that we are following the key events that could lead to major monetary system change here on this blog. Major monetary system change very likely will impact all of us in one way or another. 
I have now followed this topic for a long time and covered it here on the blog for nearly a year and a half. I don't know how this will all turn out, but I do think I know the big keys to watch for in the coming months and years. There are two big questions I have. The answers to these questions will either mean we are going to see major monetary system change or that there may not really be a reason for this blog to continue. Here are the two big questions I am waiting on answers for:
1) Will we get another huge financial crisis that is so big that the US Fed cannot fix it and the IMF steps in with the SDR on a global basis to try and fix things?  This is the Jim Rickards forecast. If Jim is right, we are going to see historic events unfold that lead to major monetary system change without a doubt. That makes this a huge question for us to follow and why we cover Jim so much here.
2) If the IMF and the SDR do become the center of a new more global monetary system, is it possible that someday new technology will allow the average person to own an asset backed currency that has the same level of system support and backing as the SDR used inside the IMF? Notice I said asset backed and not credit based currency.
If the answer to either (or both) of these questions is Yes, this blog will continue to stay on all this because we will get to witness historic change happen in real time in our lifetimes (within the next decade). We are not talking about just some minor ups and downs in the economy. We are talking about the kind of events and change that only happen perhaps once in a lifetime. That is how big all this could be.
If the answer to both questions is no however, it may be that there is no further reason for this blog to continue. If we are not going to get major change, the whole premise of this blog is off base.
 It will be awhile longer before we know the answers, but these are the two big questions for me based on all the research I have done and the input I have received from people I view as experts (people who are in a position to know what the big issues are).

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